Intermediate Accounting Ch.3 part A
Bear Corp. has $100,000 cash in the bank restricted to repay a note payable that matures in 2 years. How should this $100,000 be reported?
As restricted cash in the long-term section of the balance sheet.
On January 1 of the current year, Lafferty signs a contract to rent a building for $1,000 per month for the next three years. On that date, Lafferty pays $36,000 for rent. On January 1 when payment is made, what is the amount of the prepaid rent that should be classified as a current asset?
$12,000 Reason: The portion of rent that will be paid within the next 12 months is classified as current and the remainder is classified as noncurrent.
On January 1, Year 1, Renquist Corp. borrowed $100,000 by signing a 5-year interest bearing note payable with annual interest of 8%. The terms of the contract require Renquist to repay the principal over 5 years with a payment of $20,000 made at the end of each year. On December 31, Year 1, Renquist made the first payment plus interest. What portion of the note should be classified as current liabilities?
$20,000 Reason: Remaining balance on the loan is $80,000. $20,000 will be paid during year 2 so that amount is current and the remaining $60,000 that will be paid beyond year 2 is noncurrent.
On January 1, Year 1, Renquist Corp. borrowed $100,000 by signing a 5-year note payable with annual interest of 8%. The terms of the contract require Renquist to repay the principal over 5 years with a payment of $20,000 made at the end of each year. On December 31, Year 1, Renquist made the first payment plus interest. On January 1, Year 2, what portion of the note should be classified as noncurrent liabilities?
$60,000 Reason: Remaining balance on the loan is $80,000. $20,000 will be paid during year 2 so that amount is current and the remaining $60,000 that will be paid beyond year 2 is noncurrent.
Indicate the order of the following current assets on the balance sheet.
1. cash 2. account receivable 3. inventory 4. prepaid expenses
On January 1 of the current year, Lafferty signs a contract to rent a building for $1,000 per month for the next three years. On that date, Lafferty pays $36,000 for rent. On January 1 when payment is made, what is the amount of the prepaid rent that should be classified as a noncurrent asset?
24,000 Reason: The portion of rent that will be paid within the next 12 months is classified as current and the remainder is classified as noncurrent.
____ ____ result from the sale of goods or services on credit.
Accounts or Account Receivable, Receivables, Recievable, or Recievables
What is included in a company's paid in capital?
Additional paid-in capital Common stock
The full-disclosure principle requires that financial statements report which of the following?
All material relevant information.
Which of the following are required disclosures for related-party transactions
Amounts due to or from related parties. Nature of the relationship.
What is the difference between an account payable and a note payable?
An account payable is usually due in 30-60 days.
An accrued liability represents which of the following?
An expense that has been incurred but will be paid in a future period.
Which of the following statements is true regarding errors, fraud, and illegal acts
An illegal act is a violation of the law.
Which of the following items is classified as cash?
Bank drafts
Which of the following items are considered cash equivalents?
Commercial paper due in 1 month. Money market funds that are quickly converted to cash. U.S. Treasury bills due in 2 months.
Which of the following are common disclosures on the face of a financial statement?
Common stock information Allowance for uncollectible accounts
Deferred revenues and accrued salaries payable are examples of what?
Current liabilities
Which of the following are required disclosures for related-party transactions?
Description of transaction. Nature of the relationship. Dollar amount of transaction.
True or false: Accounts receivable result from the sale of goods or services for cash.
False
True or false: Information about fair value is commonly listed as an additional disclosure on the face of the financial statements.
False
True or false: Investments are assets used directly in the operations of the business.
False
True or false: The balance sheet will directly measure the company's market value.
False
The ability of a company to alter cash flows in order to take advantage of unexpected investment opportunities is known as what?
Financial flexibility
The intentional misappropriation of assets or deceitful financial reporting is known as
Fraud
Which of the following describes a difference between a balance sheet prepared using U.S. GAAP and IFRS accounting standards?
IFRS balance sheets often report noncurrent items first, although the format is not prescribed.
Patents, copyrights, and franchises are examples of what?
Intangibles
Assets not used directly in the operations of the business are called what?
Investments
Which of the following are subsequent events that must be disclosed in the notes to the financial statements?
Issuance of debt securities. Sale of a business. Event that affects a loss contingency.
What is the criterion to classify an investment as a cash equivalent versus a short-term investment?
It is a highly liquid investment with a maturity date of 3 months or less from date of purchase.
Which of the following are included in the summary of significant accounting policies included in the notes to the financial statements?
Items included in cash and cash equivalents. Choice between LIFO and FIFO. Method of depreciation.
What asset is listed as a separate item on the balance sheet because it has an unlimited life and is not depreciated?
Land
Which of the following are likely examples of a related-party transaction?
Loaning money to officers and directors. Borrowing or lending money at an unusually low interest rate to an affiliated company. Selling goods to affiliated companies.
An analysis provided by the company's management is included in the
Management Discussion and Analysis.
Who is responsible for the information in the annual report?
Management of the company.
Which of the following investments would be classified as a cash equivalent? (Select all that apply.)
Money market funds U.S. Treasury bills with a maturity of 90 days
When a receivable is supported by a formal agreement that specifies payment terms, it is called a
Notes receivable
The Management Discussion and Analysis section of the financial statements includes a perspective on which of the following?
Operations Capital resources Liquidity
How are property, plant, and equipment presented on the balance sheet?
Original cost less accumulated depreciation
Which of the following transactions would be recorded as a prepaid expense?
Rent for an office building paid for 12 months. Insurance paid for 6 months.
Current assets include which of the following?
Short term investments Cash
Classifying items on the balance sheet as current and noncurrent assists financial statement users in assessing what aspects about a company?
Solvency and liquidity.
Which of the following is a subsequent event that must be disclosed in the notes to the financial statements?
The issuance of debt or equity securities.
How are current liabilities satisfied?
The use of current assets. The creation of other current liabilities.
Which of the following assertions is correct regarding balance sheets prepared under IFRS and U.S. GAAP.
There are more similarities than differences between the statements
Which of the following is true regarding disclosure notes?
They explain or elaborate on data presented in the financial statements.
True or false: Any event having a material effect on operations that occurs after a company's year-end but before the financial statements are issued requires a subsequent event disclosure.
True
True or false: Balance sheets prepared under IFRS and U.S. GAAP show more similarities than differences.
True
Correctly match the accounting standard on the left with the description on the right.
U.S. GAAP <> Does not specify a minimum list of items to be presented IFRS <> Specifies a minimum list of items to be presented
Which of the following are included in inventory?
Work in process Finished goods Raw materials
The purpose of the balance sheet is to report
a company's financial position on a specific date.
An obligation to pay a supplier within 30 days should be recorded in ______ payable, whereas a signed promise to pay cash at some point in the future should be recorded as ____ payable.
accounts or account notes or note
Another term for a trade receivable that occurs in the course of a company's normal trade or business is
accounts receivable.
An expense that has been incurred but not yet paid results is a(n)
accrued liability.
Which of the following should be classified as current liabilities?
accrued salaries accounts payable current maturities of long-term debt
Which of the following accounts represent amounts shareholders have invested in the company?
additional paid-in capital common stock
Zantron Corp. pays $100,000 for robotic equipment to be used in its production facility. Zantron should include this transaction as
an increase in plant, property, and equipment.
Related third-party transactions _____ required to be disclosed in the notes to the financial statements.
are
Schwinn is a company that makes bicycles. Which of the following items would be included in Schwinn's inventory?
bicycle tires finished bicycles bicycle chains
Which of the following are noncurrent assets?
building land intangible assets
Money on hand and in banks that is available for use in the operations of the business is shown in the ____ account on the balance sheet.
cash
Which of the following items should be classified as investments on the balance sheet?
cash restricted to purchase building note receivable due in 3 years investments in stock of another company
Cash and other assets that are reasonably expected to be converted to cash or consumed within 1 year or the current operating cycle are classified as
current assets.
Investments are reported as when the company has both the intent and ability to sell within one year (or operating cycle).
current, short-term, or short term
What account is affected when a customer pays in advance for services to be performed in the future?
deferred revenues
Additional are critical to understanding financial statements and to evaluating a firm's performance.
disclosures or notes
Shareholders' equity arises primarily from amounts invested by shareholders and amounts ______.
earned by the corporation
The two sources of stockholders' equity are amounts ______.
earned by the corporation paid in from shareholders
When a company spends large amounts on research and development to obtain a patent on its own, the research and development cost is
expensed as incurred.
Inventory for a wholesale or retail company includes which of the following?
finished goods
What is the principle that requires that financial statements provide all material relevant information concerning the entity?
full-disclosure
Unearned revenue represents cash received from a customer for goods or services to be provided in a(n) ______ period.
future, subsequent, or later
Which of the following are accrued liabilities
interest payable warranty liabilities salaries payable
A technology company incurs costs to research and develop a new hand-held device and obtain a patent. This activity is an example of a(n)
internally developed intangible asset.
Assets not used directly in the operations of the business are referred to as
investments
Cash set aside for future plant expansion and a 3 year note receivable are both examples of what on a company's balance sheet?
investments
Land held for speculation, noncurrent receivables, and cash set aside for future plant expansion are all examples of
investments or assets
Which of the following are noncurrent assets?
investments with maturity of 18 months machines property
An investment should be classified as current on the balance sheet if
it will be sold within 12 months. management has the intent and ability to liquidate it in the near term.
Which of the following are considered illegal acts?
kickbacks bribes illegal contributions
Which of the following items requires supplemental disclosures in the notes to the financial statements?
leases pension plans long-term debt
Which of the following is a probable future sacrifice of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events?
liability
Common practice requires that current assets are presented on the balance sheet in the order of
liquidity
Which of the following are common characteristics of property, plant, and equipment?
long-lived tangible used in normal operations
Which of the following items should be disclosed in other long-term assets on the balance sheet?
long-term prepaid expenses noncurrent investments that are not material
Which of the following items should be included in cash on the balance sheet?
money orders cashier's checks cash on hand
Retained earnings represents the accumulated reported since the inception of the corporation and not yet paid to shareholders as dividends.
net income
Rice Company purchases a building for $500,000, which will be used as a production facility. How should the building be classified on the balance sheet?
noncurrent asset
Any receivable not expected to be collected within one year or the operating cycle, whichever is longer, is classified as a
noncurrent asset.
Which of the following is included with the annual report to help evaluate a firm's financial performance and financial health?
note disclosures
Which of the following may be recorded on the balance sheet as intangible assets?
patents trademarks copyrights
Which of the following are classified as long-term liabilities?
pension obligations notes due in more than 1 year lease obligations longer than 1 year bonds payable
Which document is required to provide information on executive and director compensation?
proxy statement
Borrowing or lending money at an interest rate significantly different from the market interest rate is a likely example of a(n) transaction.
related party
Which of the following items are required disclosures in the notes to financial statements?
related third-party transactions significant accounting policies description of subsequent events
Which of the following items should not be included in cash and cash equivalents in the balance sheet?
restricted cash
A significant development that occurs after a company's fiscal year-end but before the financial statements are issued is called a(n)
subsequent event.
Which of the following are characteristics of plant, property, and equipment?
tangible used long-term in production
Goodwill is calculated as
the acquisition price above the fair value of the identifiable net assets acquired.
A summary of significant accounting policies includes information regarding
the choice of accounting policies.
Cohen Company purchases a new building with a long-term notes payable. In the notes to the financial statements, it must disclose the following:
the interest rate on the loan the maturity date of the loan the payment terms of the loan
Mueller Company reports a long-term notes payable on its balance sheet. In its financial statement notes, Mueller Company should disclose
the maturity date of the loan the interest rate on the loan the payment terms of the loan
Assets are classified as long-term if:
they are expected to be converted to cash or consumed in more than one operating cycle
A customer pays in advance for services to be performed in a future period. In which account should the transaction be recorded?
unearned revenues
Which of the following should be classified as current liabilities?
unearned revenues accrued warranties income taxes payable
Which of the following are accrued liabilities?
warranty liabilities salaries payable interest payable
How should liquid investments expected to be converted to cash within the current operating cycle be reported in the balance sheet?
As a short-term investment in the current asset section.
Which of the following are limitations of the balance sheet? (Select all that apply.)
Assets minus liabilities is not representative of the company's true market value The balance sheet is heavily reliant on estimates rather than determinable amounts
Short-term investments are sometimes called which of the following?
Temporary investments Short-term marketable securities
Accounts receivable represents which of the following?
The amount owed by customers.
Why are inventories reported as current assets?
They are normally sold within the operating cycle.
What is the purpose of additional financial disclosures in an annual report?
To assist in understanding the financial statements.
Which of the following represents the net income earned by a corporation and not yet paid to shareholders?
retained earnings
The criteria used to determine if a liability should be classified as long-term is
it will not be satisfied within 12 months or the operating cycle, whichever is longer.
A _____ firm will include finished goods, work in process, and raw materials as part of their inventory.
manufacturing
Which of the following items are included in investments?
note receivable due in 5 years cash reserved to purchase land
Which of the following items are included in property, plant, and equipment?
oil wells mineral mines machines furniture
The time period necessary to convert cash to raw materials, convert raw materials into finished products, sell the products, and collect on the account receivable is referred to as the ______ cycle.
operating
Balance sheets often include a catch-all classification of noncurrent assets called _____ long term assets
other
If a company's long-term investments are not material in amount, where should they be disclosed on the balance sheet?
other assets
Goodwill is shown on the balance sheet
when one company acquires another company for a price above the fair value of the assets acquired.
A liability is classified as current if it is due
within 1 year or the current operating cycle, whichever is longer.
